The £2bn problem facing UK Plc (and what YOU can do about it)

04 April 2017 -

With low levels of business confidence in 2016 costing the UK £2.2bn in investment and quarter of a million jobs, what can executives and senior managers do to breach the gap for 2017?

Jermaine Haughton

If 2016 was the year of surprises, the first three months of 2017 suggest this is the year we all brace ourselves for its consequences. From the triggering of “Article 50” at the end of March, officially starting Britain’s exit from the European Union to the terrorism threat level ranking at severe, to outspoken billionaire Donald Trump facing his first major obstacles of his US Presidency.

Top business leaders and executives are analysing the situation carefully, facing the stiff task of adapting their organisations adequately to the seemingly-changing geo-political landscape, whilst maintaining their profits, supply chains, recruitment and innovation – among other priorities.

Such a challenge has already had an effect on business confidence, according to reports. The latest Gross Domestic Confidence report, devised by the Centre for Economic and Business Research (Cebr) and business consultants Newable, found a sharp fall in confidence in the summer of 2016 following the Brexit vote.

The report shows how the turbulence of last year directly impacted the UK’s economic output by negatively influencing business confidence – a key indicator of, and a contributor to, future economic performance. An important psychological factor in almost every aspect of business and management, confidence reflects the faith and assurance executives have in their company, staff, and technology, as well legislation, government and security to accomplish their business goals and objectives.

Cebr’s study calculated low confidence may have denied UK businesses another £2.2 billion of investment. Using regression analysis, researchers found a correlation between business confidence and business investment of 56%, when accounting for a two quarter lag. When controlling other factors such as GDP and interest rates, the report found that for each percentage point increase in business confidence there is a 0.09% increase in year on year business investment growth. Therefore, if throughout 2016 confidence had been at its long-term average level rather than the current lower level, this would have boosted business investment by £2.2 billion.

In addition to thwarting investment for business, the slump in business confidence last year may have also prevented the creation of 249,000 new jobs, Cebr’s research also proposed. Their research reveals a 36% correlation between business optimism and employment growth since the start of 2000 – increasing to 65% when a two quarter lag is applied. Suggesting that less confidence leads to fewer jobs being created, Cebr’s regression analysis showed that for each percentage point increase in business confidence, employment growth increases by 0.014% year on year.

Confidence levels were reported as being as low as -19 on average during the middle of 2016, according to the CBI Business Optimism Index, compared to a long-term (1972-2015) average of -5. If throughout 2016 business confidence had instead been at a level close to the long-term average, this would have resulted in an extra 249,000 jobs being created during 2016.

Further economic research from ICAEW states predicts that costs will continue to rise as inflation and commodity prices increase further, as capital investment experienced the slowest growth for three years while R&D spending has only grown moderately. The latest ICAEW Business Confidence Monitor (BCM), for example, found business confidence in the East Midlands is in negative territory for the third consecutive quarter, recording a score of -12.2. Meanwhile, in the South West of England confidence is at its lowest level in five years.

Stephen Ibbotson, ICAEW director of business, said, “Firms will try to pass many of these increases on to their customers, which means that 2017 is likely to be a year of counting the pounds and pennies for consumers following an unsustainable spending spree towards the end of last year.”

However, there are signs of British business leaders showing an ‘stiff upper lip’ to predicted economic troubles, getting on with the job and seeking to position themselves within a new post-Brexit economic landscape.

Confidence in the economy “markedly improved” to a 14-month high across industry and consumers, according to a long-running survey by the European Commission (EC), but expectations of rising inflation reached their highest point since January 2011. Business confidence improved far above the general EU trend, boosted by a strong reading from manufacturing: the index of industry sentiment rose from 7.7 in January to 9.9 points in February.

John Redwood, chief global strategist at Charles Stanley, explained UK car manufacturers are particularly benefiting from the weaker pound. He said: ”Businesses are also finding that at the current level of the pound against the dollar and euro, there is more demand for their products, both as exports and to replace imports that have just got dearer.”

“One of the export success stories has been in automotive manufacturing. Last year produced a new high for UK vehicle output this century, at 1.72 million. Most of those went for export, as UK car buyers had a strong preference for imported vehicles.

“The leading UK-based manufacturers, Nissan, Jaguar Land Rover and Mini, are overseas-owned, so there is no major quoted car manufacturing sector in the UK. The UK-based car plants nonetheless create good jobs and use local services in the UK. They also provide an opportunity for UK car component companies to supply them.”

What Businesses Can Do To Build Back Confidence:

1. Long Term Strategy and Planning

“First, plan for the long term,” the Gross Domestic Confidence report advises, “Confidence is ultimately sentiment. What we have seen is that this sentiment solidifies into statistics.”

“So businesses should avoid being knocked off course by sentiment – there is a risk sentiment can become a self-fulfilling prophecy. Businesses need to build confidence in the long-term purpose and goals of their business. Business needs to be robust enough to ride out the inevitable periodic rises and falls in fortune as they progress towards long term success. It is inevitable that on a short term basis confidence levels will rise and fall; businesses only face real issues if they lack confidence in the longer term.”

2. Pay Attention To Confidence Trends

Managers are now able to get a better grasp of current business confidence in their industry, and across the UK, as numerous statistical reports show business confidence to be quantifiable. The analysis is a resource for bosses to monitor the impact on their business, and prepare themselves accordingly.

Cebr’s researchers state: “Our research shows that levels of business confidence will impact investment and hiring decisions in particular, and B2B or R&D spend to a lesser extent, across the economy. This is a complex picture, of course – business confidence varies over time and from sector to sector – but businesses should try to develop a clearer understanding of what changing levels of confidence might mean for them, for their suppliers, clients, customers and competitors. Businesses should look for opportunities that increasing or waning confidence in different parts of the economy might offer them.”

3. Maximise The Quality of Your Product or Service

Remember your strengths. Confidence within your organisation is likely to underpinned by feeling that you are creating great products and/or services and have a strong, motivated team. Typically, companies with these stabilising building blocks can better withstand external turmoil and pressures.

Susan Marshall, author, speaker, and Founder of The Backbone Institute, which teaches how workforces can be more confident, said: “Organisational confidence is strengthened when individuals develop personal and professional confidence. Such confidence represents a significant competitive advantage, which industry leaders understand and promote. Indeed, organizations that display a high level of collective confidence benefit from better leadership, higher levels of productivity, stronger teams, happier employees and better ideation.

“Confident organisations know their business and work to ensure that all individuals do, too. They have a singular focus on customers and challenge every individual to keep a sharp eye on how their work ultimately impacts the customer. Finally, they practice feedback as a daily dialogue rather than making up something to say during performance reviews.”